The Beer Distribution Game, the Bike Industry, and You

General Discussion
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Chatting with @Daniel_Y the other week got me thinking on supply chain issues and how small builders can address them in ways that the larger bike industry can’t. I’ve been thinking a lot about that as I’ve talked to bike shop owners over the past few months. They pretty universally had a similar narrative:

  • Bike sales boomed in the pandemic
  • Supply became hard to get ahold of (delayed, cancelled, etc)
  • When orders began to be fulfilled, the boom was waning
  • Now they’re sitting on excess inventory, unable to move it
  • Manufacturers are in a similar spot and are undercutting shops on pricing

This tracks with the “Beer Distribution Game” which is a thought experiment to examine the pitfalls of supply-chain coordination and the implications of under- or over-ordering product.

All this seems to have led to a general distrust/dissatisfaction with the larger bike frame & bike component manufacturers and distributors. I see this pain point as a real opportunity for small-time frame builders. By running production closer to the end user and with less overhead, a builder could help a local bike shop stay lean on their inventory and adapt to the changing demands of the market. The value in reducing inventory is not immediately apparent, but I think it could be substantial.

I’m not sure if this thought is relevant or revelatory, but I think it’s worth examining the value that a local manufacturer can provide outside of the usual values of creating something bespoke, custom, or intrinsically unique.

I’d love to hear more thoughts about what value you think that small, independent fabricators can provide their local communities!

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Are you proposing selling bikes through shops? If so, that business model died in the 80s - there’s no longer enough meat on the bone to put a middle man between the (developed world/needs to make minimum $50/hour) builder and the customer.

Or were you saying something about component inventory? I don’t see how small builders could be helpful there, really. The bike industry has been through regular bullwhip inventory effects probably going back to the 1800s. The mid 90s mountain bike bust makes this current glut look like peanuts (but C’dale paid Missy a cool million bucks and made a moto right before going under!)

Keep in mind: bike shop owners are (sorry bike shop owners) morons. If there’s any industry in which bright eyed idealistic people lose their shirts more than the restaurant industry, it’s bike shops. Anyone who has worked at a few has seen them go under, which they do constantly. If you do decide to partner with a shop be VERY careful that the shop going under won’t take you under as well.

-Walt

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I have to say I mostly agree with Walt.

It’s important to remember these inventory issues are not unique to bike shops. Pretty much every retailer from small mom and pops to giants like Target are having issues. And even during “normal” times outside of these pandemic issues it happens all the time. It’s why stores like TJ Max, World Market, Sierra, Tuesday Morning etc exist. Somebody forecasted wrong and a company ends up with way too much inventory. So they sell it at breakeven cost just to get rid of it, get some cash, and start the cycle over. And that’s what smart bike shops should be doing right now, they need to move that excess inventory even if they’re not making much profit on it.

But for the sake of outside thinking, I propose this question:

Demand is set by the consumer.

Retailers respond to changes in demand by scaling up or down. High demand = more sales volume.

The goal of manufactures however is to operate near their maximum capacity. To scale up they need to increase their capacity, which means hiring. To scale down is layoffs. Stability is preferred. Operating too far below capacity and the company won’t be making enough to stay afloat. Too high above capacity and they burnout from overtime.

So the question is, how do manufactures that prefer stability assist retailers that are motivated to ride the waves of demand changes?

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I found an online beer game. I was playing as the retailer and it quickly got out of hand :rofl:.

https://beergame.masystem.se/

This was one of my big takeaways from the Wikipedia article:

there are four stages, manufacturer, distributor, supplier, retailer, with a two-week communication gap of orders toward the upstream and a two-week supply chain delay of product towards the downstream.

It’s 2023 and you should be able to cut out half of those middlemen. Specialized, Trek, and Pon/Santa Cruz/Cervelo agree. They have been buying out shops across the country and opening up “Experience Centers”. They are cutting out the fluff to go direct to consumers.

I agree with this, but maybe a bit more tactfully :sweat_smile:

Regardless, I think good bike shops are the allies of framebuilders. We partner with local shops that we believe do good for the community (Adams Ave in San Diego and Full Metal Cycles in Norcal).

In my opinion, Adams Ave is the hub of cycling culture in San Diego. They are inclusive, they host a lot of rides, and give back to the community. However, it’s hard for them to convert the goodwill into sales because they don’t have high-end bikes to sell:

  • big bike brands require minimum spending amounts
  • The big corporate brands don’t fit the culture of the shop
  • It’s difficult to stock a full size range of high end bikes

That’s where custom frame builders come in:

  • We can offer high-end $5k-6k bike
  • We can design and spec bikes that suit the local riding scene
  • They don’t need to keep bikes in stock

As @anon91558591 points out, margins are still a big issue. We lose 20-30% of the profit from a shop sale. We still do it to feed the communities we believe in. It’s part of my bigger-picture view of cycling and society. Maybe it’s idealistic or just wrong, but if we just accept the way things are, things will never change!

I think good bike shops don’t need to ride the waves of demand, I think they create the demand. From my experience, the retention rate of all those new pandemic bike owners is very low. Without shops to host group rides, cycling-friendly infrastructure, trail/access advocacy groups, and a friendly community, you can’t grow the pie.

That’s where I think framebuilding has an advantage over bigger companies. We don’t need to play the same game as everyone else.

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Totally agree with the benefit of having good relationships with local shops and the impact and influence they can have on their community. On a micro level they might be able to create some demand. My question above is about the macro level demand boom caused by Covid, and the corresponding inventory issues.

The bike shops that are now struggling with excess inventory either:
A) got greedy and tried to cash in as much as possible on the surge, or
B) were naive and thought that level of demand would be the new normal.

The shops that stayed true to their core business and business plan are doing just fine.

That’s all speculative of course. Call it an educated experience based guess.

And for the record I’m all for a revolution to change the industry dynamics.

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Don’t need to keep bikes in stock?

I mean, I can whip out a frame in a day. But I’m not hovering by the phone waiting for a shop to call in an order. And often I need to order dropouts or some other small item, or a tube, and the frame has to be finished/powdercoated and prepped and then you gotta get the parts and assemble it all…

Realistically even a really fast operation is going to take a week to deliver a bike to a customer and that’s a best-case scenario. High end bike customers usually expect to walk out of the shop with a bike the same day in my experience, and to do that, you have to stock bikes (or the framebuilder does, which is just transferring the inventory risk to yourself to benefit the shop, at the same time that you’re giving them a bunch of your profits).

I mean, it’s like any other retail for oven mitts or pet food or 2x4s. If people want something in a week they will just order it consumer direct. If they want it today they’ll go to a shop. So you have to maintain at least some inventory.

-Walt

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R&E in Seattle is a local shop with framebuilding on site. I don’t think they really carry any other brands anymore. They turn around custom painted/built bikes in 4-6 weeks. A decade ago they specialized in women’s bikes and tandems, now they do road/allroad, city, Rohloff/S&S touring bikes and tandems.

They are popular in Seattle, I see a Rodriguez bike almost every time that I’m out. Of course I see more Treks and Specialized, but Rodriguez is popular here for high end bikes. Many of my friends have them too. 4-6 weeks isn’t immediate turnaround, but it’s pretty fast.

I think they currently have 2 full time frame builders and 1 painter on staff, plus the shop folks.

A nice thing about this model is that the builders aren’t the sales people and don’t get distracted much with customer interactions.

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That’s cool (and Rodriguez has been around forever so they know their stuff) but it’s not partnering with a shop - it’s operating a micro-production business ala Moots.

-Walt

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Yes, it’s not partnering. It’s like a super mini-Seven or Moots. I’m surprised that it isn’t more common or popular.

Also locally, Davidson and Elliot Bay Bikes were a blurry line between partnership and house brand.

As you said too many layers of business doesn’t have any economic advantage and just adds costs. A deeper partnership is one way to bring those costs down. 10 years ago I also understood that being a manufacturer got you the lowest prices from distributors on parts, helping the shop with better margins. I don’t know if that is still true.

Contract building is another option, like Elephant (Glen Copus) building for Endpoint Cycles and other brands. Some well know builders also contract built for Box Dog Bikes and other shops. I’ve always wondered how well the money worked out for this.

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Manufacturers still get preferential (below wholesale) parts pricing but there are pretty strict rules limiting that to parts to be hung on frames. You can’t order an OE derailleur and sell it to someone at your retail shop.

-Walt

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Agreed. I think most shops are outdated. They are like blockbusters in a Netflix age. Most of the don’t even have real-time online inventories. There are a few good shops out there, and those are the ones we want to work with.

All the frames are still made to order so customers expect to wait for 2-3mo. They are smart enough to go on our website to buy a frame directly from us, but they prefer to support the shop.

This is the type of community engagement we are aiming for!

This is what I learned from the start-up tech world: behind every decision we make, we have a vision, a manufacturing plan, a budget, a clear deadline, and most importantly, we are not afraid to kill the project.

Throwing back to the stock vs custom model debate, we list both options on the site and let the consumer decide. No one picks custom. The same can be said for partnering with local shops. Nothing stops the customer from ordering directly through us. They choose to support the shop.

Sure we are losing some profit. But I spend 30-40% of my time doing marketing projects (which I hate). If we reach a critical mass within the community like Rodriguez did, we will have much more security and I won’t need to market anymore!

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I like the idea of “re-localing” (“hyper-onshoring”?) bike manufacturing. I hope it works out for you guys. I’ve seen an awful lot of bike shops, framebuilders, big manufacturers, and all sorts of combinations thereof fail over the years, though - usually because eventually the passion isn’t enough by itself.

Everyone eventually meets a partner and wants to buy a house and start a family, or needs to take care of a sick relative, or just gets tired of cutting up their knuckles for minimum wage, and that’s the end of it.

-Walt

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I’m loving the conversation here! Walt, I think you bring up a lot of good points/critiques about bike shop operation and how it’s not something to plan a business around. And Alex, I definitely had R+E in mind when thinking about this. It seems like they are fairly ubiquitous “high-end” bikes in the Seattle metro area, but are at this point kinda resting on their laurels imo. Daniel, I think we’re kinda on similar mental paths with this - it’s super cool to see how you’ve done similar work with Neuhaus.

I didn’t think much about the local part of small-time building until moving to Pittsburgh. There’s such a local pride there that I hadn’t experienced anywhere else. It’s part pastiche and a bit over the top sometimes, but also quite genuine. It’s also not a historically wealthy area and the bikes being sold at most shops reflect that.

This led me to think about what value would tip folks over from buying a nice Trek/Giant/Specialized into saving for a bit and spending more for a frame of mine. While artistry and craft are things I try to put in every build, I couldn’t see those values necessarily swaying folks. But locally made would be huge. Part of partnering with a shop would be to lend credence and credibility to one’s name, but they also have their own community to tap into.

If they can do what they’re good at (customer service, part buildups, selling bikes) and I can do what I’m good at (design, fabrication, paint), it seems like a total win-win. The big obvious caveat is that the numbers need to work out somehow. If we’re all taking losses to move product, that’s a total non-starter. Part of this is acknowledging that there’s significant cost to externalities like holding inventory or customer service and finding a mutualistic relationship could be a step toward offsetting those.

This was a bit of ramble, I’m really just excited to be having this conversation with all of you!

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@Daniel_Y said most of what needs to be said about why we partner with shops. One point to add on is that it helps us target a geographical market. Very few of my bikes have stayed in California, even fewer have stayed in the Bay Area. Shop partnerships will help us change that without having to much additional work. It’s also worth noting that we aren’t necessarily partnering with the shops that sell the big brands, those customers are as @anon91558591 described, looking for instant gratification.

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They don’t chase trends for sure, and that results in them building with more classic component choices. They took a long time to embrace disc brakes and I don’t think they are really doing through axles yet. However they build pretty nice bikes give what they do use, and it’s one of the rare places where you can get a fast turnaround light steel frame.

At the same time their bikes are ridden for decades and rarely get trapped from using some weird component choice.

It’s a niche that I understand and respect, but it’s not something everyone will do. It’s probably closer to what I’d build.

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If you find a shop that’s been around for 20 or 30 years, I could see it working, maybe.

If it’s your buddy that is super cool and opened a shop and sponsors alleycats and gives bro deals to his friends… good luck. That same person has been opening bike shops and going broke for decades it feels like.

-Walt

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This is a fun topic. Hopping back to the original question - I think small/medium frame shop’s advantage for the last ten years has been being that nimble shop and not helping local shops stay nimble. Handmade bikes pushed the first 29ers and “gravel bikes”, plenty of new standards.

The points regarding marketing value here ring true. Having people who work in bike shops talk about your bikes is one of the best pieces of marketing besides just getting bikes out into the world. The shops that are sticking around are the ones building community as you’ve pointed out Daniel, and people trust their mechanics in those shops. If you can sell those bike shop folks on your bikes they can sell lots of people on your bikes for you.

Over the years I have chatted with a few builders who work with bike shops successfully (Mosaic, Moots, Stinner). If you look at their prices, they are probably taking home the same or more as most builders do after they pay the bike shop their margin. It is a very smart business model because it targets customers who are probably going to write a blank check, it offloads marketing/sales on to the shops and builds brand clout, and they are making enough money to stay in business. That route may stand in opposition to the type of community you are looking to build though. Perhaps those customers are into it because it is the one bike in the shop more expensive than the most expensive specialized on the floor.

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